Baxter Inc. has a target capital structure of 30% debt, 15% preferred stock, and

Question

Baxter Inc. has a target capital structure of 30% debt, 15% preferred stock, and 55% common equity. The company's after-tax cost of debt is 7%, its cost of preferred stock is 11%, its cost of retained earnings is 15%, and its cost of new common stock is 16%. The company stock has a beta of 1.5 and the company's marginal tax rate is 35%. What is the company's weighted average cost of capital if retained earnings are used to fund the common equity portion?

12%

13.8%

14.45%

11.2%

Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Crandal's flotation expense on the new bonds will be $50 per bond. Crandal's marginal tax rate is 35%. What is the pre-tax cost of debt for the newly-issued bonds?

10.25%

8.12%

8.76%

7.49%

Explanation / Answer

Solution:

Computation of Weighted Average Cost of Capital

                         Weighted Average Cost of Capital = Weight of Equity * Cost of Equity + Weight of Preferred Stock * Cost of Preferred Stock + Weight of Debt * Cost of Debt

           

Particluars Weights ( given) Cost Weights * Cost Commomn stock 55 % or 0.55 16 % = 8.8 % Debt 30 % or 0.30 7 % ( after tax) = 2.1 % Preferred Stock 15 % or 0.15 7.15 % = 1.0725 % WACC 12 %

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.